Q: I have seen various instances where
receivers have requested that funds from returned or uncashed checks from
a distribution be redistributed to other claimants or used to pay
administrative fees or costs. Is this proper? Can the receiver get in
trouble for not simply escheating the funds?
A: In California, what a receiver is to do with unclaimed funds is
specifically governed by California Code of Civil Procedure § 570. It
provides: “A receiver having any funds in his hands belonging to a person
whose whereabouts are unknown to him, shall, before receiving his
discharge as such receiver, publish a notice in one or more newspapers
published in the county, at least once a week for four consecutive weeks,
setting forth the name of the owner of any unclaimed funds, the last known
place of residence or post office address of such owner and the amount of
such unclaimed funds. Any funds remaining in his hands unclaimed for 30
days after the date of the last publication of such notice, shall be
reported to the court, and upon order of the court, all such funds must be
paid to the State Treasury accompanied with a copy of the order, which
must set forth the facts required in the notice herein provided. Such
funds shall be deemed to have been received by the State under Chapter 7
(commencing with Section 1500) of Title 10 of Part 3 of this code and may
be recovered in the manner prescribed therein.” [emphasis added] Because
the statute uses the words “shall” and “must,” it seems pretty clear that
the legislature provided that this is the remedy that is supposed to be
followed by a receiver when he or she has unclaimed funds. There are no
California cases providing that a receiver can vary this procedure and
avoid escheating unclaimed funds. Although, to be honest, there are no
cases interpreting this statute at all, despite the fact that current
language in the statute has existed since 1963 and the escheatment
procedure for unclaimed funds held by a receiver was originally adopted in
1913. Underlying the statute is the fact that unclaimed funds in a
receivership do not belong to other creditors or to the receiver or his or
her professionals. The funds belong to the designated payee and, even if
they cannot be located, they should have the opportunity to possibly
receive their funds through the Unclaimed Property Law.
With regard to penalties for non-compliance, that is
not completely clear. While § 570 states that the funds once escheated
shall be governed by the unclaimed property law (Code of Civil Procedure §
1500 et seq.), the provisions relating to the receiver escheating
unclaimed funds is not in the unclaimed property statute. That statute
does provide, however, that any person who “willfully refuses” to pay or
deliver escheated property to the Controller, as required under the
chapter, shall face a fine of not less than $5,000 or more than $50,000.
Code of Civil Procedure § 1576(b). However, the statue also provides that
“no person shall be considered to have willfully failed to report, pay or
deliver escheated property…unless he or she has failed to respond within a
reasonable time after notification by certified mail by the Controller’s
office of his or her failure to act.” Code of Civil Procedure § 1576(c).
Unlike in California, there is no specific
escheatment statute for federal receivers. The closest applicable statute
is 28 U.S.C. § 2041 which provides: “All moneys paid into any court of the
United States, or received by the officers thereof, in any case pending or
adjudicated in such court, shall be forthwith deposited with the Treasurer
of the United States or a designated depository, in the name and to the
credit of such court.” Because a receiver is an officer of the court, this
statute seems to require a federal receiver to escheat unclaimed funds to
the Treasurer. Once again, however, there are few cases interpreting the
statute and none of them deal with receivers.
*Peter A. Davidson is a Partner of Ervin
Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes
representing Receivers and acting as a Receiver in State and Federal
Court.
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